Soft Retail Sales, Private Label Woes for ConAgra in Q4

Omaha, Nebraska, USA-headquartered ConAgra Foods, a manufacturer and marketer of diversified product lines ranging from refrigerated hot dogs and shelf-stable ketchup to frozen dinners and french fries, announced on June 18 that comparable fiscal 2014 fourth quarter earnings per share (EPS) will be below prior expectations. This is largely due to a seven percent quarterly volume decline in its Consumer Foods segment, as well as weak profits for the Private Brands sector.

While all financial details are not yet finalized, diluted per share performance from continuing operations for the fiscal 2014 fourth-quarter – which ended on May 25, and will be reported in more detail on June 26 – is expected to be approximately ($0.76) as announced, reflecting significant non-cash impairment charges as well as other items impacting comparability. After adjusting for items impacting comparability, fiscal 2014 fourth-quarter EPS is expected to be approximately $0.55; the company’s previous guidance anticipated comparable EPS slightly in excess of $0.60 for the quarter.

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Gary Rodkin, chief executive officer of ConAgra Foods, commented: “We are disappointed with the Consumer Foods volume performance, which negatively impacted comparable EPS. As we have communicated, we are in the process of improving product mix and promotion strategies in the Consumer Foods segment for better results and greater effectiveness, and we expect our volume performance to improve in fiscal 2015 as a result of this. Given the profit challenges in our Private Brands segment, we are also focused on margin improvement initiatives to offset the impact of pricing concessions. Even though our earnings are below expectations, we exceeded our fiscal 2014 operating cash flow and debt reduction targets.”

He continued: “Given the challenges we faced in fiscal 2014 with regard to Consumer Foods volumes and Private Brands profitability, we are in the process of gradually strengthening several areas of our company. We anticipate fiscal 2015 to be a year of stabilization and recovery that delivers mid-single-digit comparable EPS growth. Comparable EPS growth in fiscal 2016 and 2017 should accelerate to a high-single-digit rate as we benefit from stronger underlying operations, generate sizeable productivity and administrative savings, and continue to realize substantial synergies from the Ralcorp [private label manufacturing company] transaction.”

ConAgra acquired Saint Louis, Missouri-headquartered Ralcorp for approximately $4.95 billion in 2012, making it the largest producer of private label packaged foods in the United States. The unit’s product line runs the gamut from breakfast cereals and pasta to cookies, crackers and frozen baked goods.

Among ConAgra’s retail frozen food brands found in supermarket freezer cases are Healthy Choice and Banquet meals; P.F. Chang’s Asian-style ready meals and appetizers; Bertolli Italian-style meals and soups; Marie Callender’s ready meals and desserts; and Alexia frozen breads, appetizers and potato side dishes. Its Lamb Weston unit is a major supplier of frozen potato products and snacks to the foodservice sector around the world.

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“Administrative savings are expected to play a growing role in future EPS performance as we implement effectiveness and efficiency initiatives resulting from significant work over the past fiscal year,” said Rodkin. “Throughout this period of anticipated stabilization, recovery, and eventual acceleration of EPS performance, we expect to have the flexibility to invest in our business for good long-term growth. We plan to continue our current $1.00 per share annual dividend payment, and remain committed to a strong dividend policy in the future.”

Quarterly operating profit for the Private Brands segment is expected to show a comparable year-over-year decline of approximately $60 million. While the majority of the profit shortfall was driven by pricing concessions, cost challenges associated with integration and business transition also weighed on profit performance. The company remains highly confident in the long-term growth opportunities for its private label products, given strong value-added capabilities that will be leveraged in the years ahead, the fundamental appeal of private brands to consumers, and the strategic importance of private labels to the retail customer base.

Based on the challenges in the private label market during fiscal 2014 and the gradual nature of the anticipated recovery from fiscal 2014 earnings levels, the company’s current profit projections for the Private Brands segment are below original plans for the next several years, despite continued expectations for achievement of strong cost-related synergies in line with original plans.

These revised profit projections, as well as expectations for continued profit challenges for some retail brands (primarily Chef Boyardee canned pasta products), have resulted in an estimated $681 million of non-cash impairment charges in the fiscal 2014 fourth quarter. These non-cash charges, most of which relate to the Private Brands segment, reduce the amount of goodwill and other intangibles on the company’s balance sheet, and the resulting non-cash expenses are being treated as items impacting comparability. The revised profit projections for the applicable segments have been taken into consideration in the fiscal 2015-2017 EPS growth expectations.

ConAgra noted that it generated in excess of $1.5 billion of cash from operations and repaid approximately $600 million of debt during fiscal 2014, exceeding targets for the fiscal year. The company is confident in its ability to meet its fiscal year 2015 debt repayment goals as well. The company will provide more financial and operating details on the current quarter performance, and future EPS outlook, with its regularly scheduled earnings release on June 26.